VC Byron Deeter: The Cloud Is Still In The Early Days

As seen with the IPO market last week, the cloud operators remain popular with investors. Just look at Covisint (COVS), whose shares rose by 26% and RingCentral (RNG), which pulled off a 40% first-day performance (I interviewed the CEO of the company).

But can the good times continue? Or might we be seeing a peak?

To get some answers, I recently talked to venture capitalist Byron Deeter, who is a partner at BVP. And yes, he’s certainly upbeat. Keep in mind that his firm has invested in breakout companies like Box,
Cornerstone OnDemand (CSOD) and Eloqua.

So here are some of Byron’s takeaways:

Cloud Power: “The cloud trend has been a transformative event. There are now 33 pure-play public companies in the sector and the total market cap is well over $100 billion. There is also a massive pipeline of IPO and M&A candidates.

“The investor appetite is strong because of the predictability of revenue streams as well as the long-term growth potential. This has given cloud companies healthy forward values.

“Based on our analysis, the cloud has only 2% penetration of information technology (IT) spend. So we think there is massive market potential for all layers of the market, whether for applications, platform as a service (PaaS) and infrastructure."

Legacy Operators: “To survive, legacy players have been looking to M&A. This wave has been going on for about two years or so. There was no 'build option' since the legacy players gave up too much ground.

“The M&A activity has also validated the cloud, which has benefited those companies that have remained independent.”

B2D: “We like PaaS right now, especially those companies that are focused on developers. We call this B2D (business to developer).

“Companies like Twillio have built services that are easily integrated into an app, which adds core functions. Customers can try out the technology and if they like it, they can buy it.

“We’ve already seen the value of this approach with eBay’s recent $800 million acquisition of Braintree.”